Bernie Fraser to plead the fifth

Former Reserve Bank governor
Bernie Fraser
says it is unclear whether Treasurer
Wayne Swan
’s mooted fifth pillar of banking – credit unions and building societies – will be the winner from government reforms to boost competition by increasing the ease of account portability.

Mr Fraser will report to the government by the end of June with an outline of the obstacles and the case for portability for account holders.

This is perceived to be a barrier to competition, as some customers are discouraged from switching financial providers for a better offer due to the difficulty and time required to transfer their direct debit arrangements to another bank.

Mr Fraser told The Australian Financial Review there had been scant industry feedback on the proposal, announced in December, due to the holiday period.

“I’m talking to Treasury, who are providing a lot of assistance, and will be going to meetings with industry," he said. “I don’t know how this will work out and am trying to get a handle on how significant an obstacle account switching is, what the costs will be and who any changes [in terms of financial services players] may benefit."

He added: “Obviously though, consumers should be the main beneficiaries."

Mr Fraser said it was premature to speculate on the business case for investment in account portability before further industry consultation took place.

The Treasurer this week outlined five key areas for Mr Fraser to explore as part of the government’s account number portability proposal.

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In a letter to Mr Fraser, Mr Swan said there was evidence that difficulty in account switching was a barrier to customers moving lenders.

“Whilst the challenges in achieving full deposit account portability should not be underestimated, with no other country in the world having introduced this technology, I believe there is merit in exploring potential options further," he said.

Portability is one of several reforms proposed by Mr Swan in December to address the dominance of major banks in mortgage lending. It was prompted by accusations that their dominance gives them unfair pricing power. Banks dispute this.

Account number portability may enable customers to chase sharper interest rate offers and would, theoretically, increase lender competition for borrowers through better service and pricing to discourage account holders from switching.

Mr Swan has asked Mr Fraser to work closely with the Reserve Bank, regulators and stakeholders to explore a number of issues, including the costs of implementing possible options and time frames; local and international schemes being explored or implemented; and technological limitations on account portability and developments that could facilitate it.

Mr Swan has also asked what changes to infrastructure would be needed to execute account portability and for information on the role of any central account registry in supervising customers account data to ensure security and privacy.

As part of its competition package, the government has also floated the possibility of portable lenders’ mortgage insurance. This incurs costs for borrowers of several thousand dollars and must be paid every time they switch home loans, even if there is no change to the original asset.

Lenders have argued that the cost of mortgage insurance is a greater disincentive to switching than mortgage exit fees. Such fees were banned in the government’s reform package.

The introduction of more comprehensive credit reporting will give firms such as Veda far greater detail of a clients’ credit history, potentially enabling them to provide such data to any central account registry.